Why Fundamental Analysis is important in Forex Trading
There seems to be tremendous focus on Technical Analysis in the Forex industry. Most retail traders are of the opinion that someone does not need Fundamental Analysis in order to trade successfully. Some even ask why Fundamental Analysis is important in Forex Trading.
A more important question would be why the majority of institutional traders predominantly rely on Fundamental Analysis if it was redundant? We hope that this article will help fellow retail traders understand why Fundamental Analysis is important in Forex Trading.
Why 95% of Retail Traders Fail?
Statistics show that between 90% and 95% of retail traders never succeed in trading. That is a scary number. What are the main reasons why so many retail traders never become profitable?
There are many reasons why retail traders fail. However, we have grouped the common reasons into 3 main categories namely; emotions, commitment and skill.
The first reason why majority of retail traders fail is because of Emotions. Emotions can turn the best of traders into gamblers. When emotions are not managed, it will cause traders to abandon their process and make unnecessary mistakes. A trader who does not have control over their emotions when they trade is like a ticking time bomb which will eventually explode.
The other reason why retail traders fail is commitment. New traders fail to fully understand how difficult Forex Trading can be. The average retail trader does not have the determination to succeed in trading.
Majority of retail traders think Forex is a get rich quick scheme and soon give up when they find out this is not the case. Unfortunately there is no pills you can take which will make you committed, you either have it or you don’t.
The third reason why traders fail is skill. Trading is one of the most challenging endeavours a person can undertake. It takes a lot of skill in order to trade the market successfully. These skills cannot be learnt overnight and takes time to develop.
However, why do some of the most skilled retail traders still fail? Having skills will only result in success if your skills are based on the right things. Majority of retail traders have excellent technical analysis skills. However, most of them never take the time to gain Fundamental Analysis skills.
Any trader who only uses technical analysis without the Fundamentals are missing a key trading component. Trading without Fundamental Analysis skills is like trying to shoot a target at a distance of 200 yards with a scope. Sometimes you’ll hit the target, but achieving consistency will be very difficult.
In the same way, Fundamental Analysis skills are an essential part of trading success. Without it there will always something missing to complete the puzzle.
Which skills are Institutional Traders focused on?
Most retail traders envy the trading success enjoyed by Institutional traders. Most retail traders are always focused on the next best indicator or the next best technical analysis strategy.
Conversely, most institutional traders placed far more emphasis on Fundamental Analysis skills compared to technical analysis. Institutional traders first utilise Fundamentals to establish the most likely direction for different currencies.
Only after they have established a bias would they look to the charts for their technical analysis. Interestingly, professional trading firms are willing to pay up to $24,000 per year for a single Bloomberg Terminal subscription.
If Fundamental Analysis was not important, why would professional trading firms pay these huge amounts to provide their traders up to date Fundamental Analysis information? This fact alone should beg the question of why Fundamental Analysis is important in Forex Trading.
The place for Technical Analysis?
So where does Technical Analysis fit into the picture? Fundamental Analysis is what we use to choose the best probability trade direction. The technicals is what we use to determine the best possible entry and exit levels.
Technical Analysis skills are still crucial to trading success. Without Technical skills you will not be able to execute, manage and exit trades properly. However, they should happen after Fundamental Analysis has been done.
Knowing what current sentiments are driving the market is essential to trading success. The market is emotional and it is emotional people who make the decisions of where to move the market. As traders we always need to ask ourselves how we think the market will react to certain announcements or economic data.
The sentiment in the market will give us the best probable trade direction using Fundamental Analysis skills. After this we use Technical analysis to establish the best places to get in and out of the market.
There is more to trading than just looking at price charts and following technical systems. We hope that this article helped shed some light on the reasons why Fundamental Analysis is important in Forex Trading.
The Fundamentals are definitely more challenging to study and master. However, it is absolutely worth the effort and time if you want to take your trading to the next level.
As always, make sure that you do not risk real money in trading until you have received proper training. Remember, trading without knowing what you’re doing is not trading it’s gambling.